According to the latest issue of the Corporate Debt and Treasury Report, corporates should be wary of over-reliance on bank debt and the assumption this type of funding would always be readily available in the amounts required.
Treasurers are contending with higher interest rates and less certainty over preferred debt options, particularly with the perception that with the collapse of a number of US-based banks and the emergency takeover of Credit Suisse earlier this year there is a risk of banks materially changing how they deploy capital.
Comments made by of one of the UK corporates surveyed for the report were particularly interesting (“Debt diversification is key… traditional bank financing is no longer always the most appropriate or most cost efficient form of debt.”)
While the report noted alternative lenders have not established themselves as a significant presence in the corporate debt market, significant numbers of corporates are accessing alternative providers for receivables finance.
The inability to secure the necessary funding from its bank persuaded S3 Industries – a supplier and distributor of flowline equipment to the oil and gas market – to seek a more flexible working capital solution on a non-recourse basis to meet customer demand for extended payment terms.
Increased logistics costs had impacted the company’s cash flow. The solution was receivables financing, which has accelerated the company’s payments by releasing cash trapped in outstanding invoices and enabled it to grow its business across North America.
Receivables financing became a flexible, reliable and rapid source of funding at a time when getting finance from its bank wasn’t feasible explains company President, Kyuin Shim.
“If we hadn’t adapted our core customers would have looked at other avenues and if we didn’t extend or amortise some of our payment terms, another supplier would,” he says. “Customers have not gone back to paying as quickly as they had before the pandemic and logistics costs have also stayed high.”
As we are at the top of the monetary tightening cycle with interest rates arguably at their peak, it is not really a good idea for corporates to close long-dated, fixed rate private placements suggests Douwe van Duijvendijk, Managing Director Corporate Debt Capital Markets at ING.
“It is probably more likely that interest rates might decrease over time,” he says. “The fact that there is still a decent amount of private placement issuance getting done is probably more eye-catching as under current conditions it would not be unusual to see volumes drop if you have bank alternatives available. These volumes are being driven by normal refinancings and issuers who have a view that rates will remain elevated.”
Credit becoming much more attractive than it was when rates were in negative territory has negatively impacted the alternative lending market, with investors attracted to senior bonds with coupons between 3-4%.
Munawer Shafi, Head of Structured Finance at Aviva Investors observes that alternative lenders never established a significant presence in the investment grade corporate debt market, instead focusing on either more esoteric and complex financing instruments – such as receivables and leasing arrangements – or sub-investment grade loans.
“Unlike traditional private placement lenders, alternative lenders often have a high risk and high return appetite which can be difficult to meet in the investment grade corporate financing sector,” he says. “We do, however, see a gap in the more crossover space where corporates are not well covered by transitional private placement lenders and are not part of the alternative lenders’ investment universe.”